Changes in Attitudes, Changes in Latitudes: Practical Tips for Employers Going Global. By: Oscar de la Vega

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1 Changes in Attitudes, Changes in Latitudes: Practical Tips for Employers Going Global By: Oscar de la Vega Globalization is without a doubt an on-going phenomenon when it comes to doing business in every corner of the world, thinking global has become a must when it comes to maintaining a competitive level and labor matters arise as one of the main issues to be dealt with in order for businesses to achieve success and prosperity. With this in mind, it is important for employers all over the world to take into consideration the following aspects when it comes to doing business in Mexico: I. WORKFORCE UNIONIZATION A. Collective Bargaining Agreements One of the social guarantees contained in the Mexican Constitution, which was the first one to include such guarantees in the world, is precisely the employees right to unionize, and collective negotiation for employees to obtain improvements in working conditions through the execution a collective bargaining agreements. Collective agreements are executed by one or more unions with one or more employers or one or more employers' associations. They may be executed for a definite or indefinite term or even for a specific project, but the same must always respect minimum rights granted under the Federal Labor Law ( FLL ). Collective bargaining agreements must include the names and addresses of the parties, the location where the work is to be performed, the term, work-shifts, rest days and vacation days, salary scales, and other terms

2 and conditions of employment which are negotiated by the parties. In the same manner, both parties may request an annual review of the wage scale and every two years a review of all other provisions contained in the collective bargaining agreement. A request for a review of the collective bargaining agreement must be made at least sixty days prior to the second anniversary of the agreement. Wage revisions must be requested thirty days prior to the anniversary or expiration date. If no timely request for revision is made, the agreement is extended for a period equal to its original term. It is important to take into account that management employees, however, may be expressly excluded from a collective bargaining agreement, in the understanding that such employees are allowed to have their own collective bargaining agreements. Nevertheless, as a practical matter, no unions for such employees exist. B. Right to Strike The Federal Constitution guarantees the employees' right to strike. It is important to note however that strikes in Mexico imply the actual closure of the facilities and prevents employers from hiring permanent replacements, from operating during strikes (except for essential safety services), or from locking out employees. A strike must have one of the following lawful objectives: (1) to attain a balance between the workers and the employer s rights; (2) to demand from the employer the execution, revision, or compliance with a collective bargaining agreement; (3) to force compliance with the employer s obligation to pay profit sharing; (4) to annually obtain higher wages; or (5) to support a strike of another business aimed at achieving any of the above-mentioned objectives. The Union is required to file with the Conciliation and Arbitration Board (the administrative agency in charge of solving employeremployee disputes) a strike notice prior to the planned strike. The Labor Board must then serve the employer with the notice to strike within the following 24 hours of receipt. The notice should state the union's demands, its intention to strike, and the strike objective. The employer must be given with at least six days notice prior to the date planned for the strike to take place (ten days if public services are involved). The employer must file a written response within 48 hours of receipt of the notice. The Conciliation and Arbitration Board then holds a hearing to try to seek a settlement. The Union may postpone the commencement of the strike in an attempt to reach a settlement.

3 Within 72 hours after the strike has taken place, the employer may request the Conciliation and Arbitration Board to declare the strike illegal. The Board will do so only if the strike has an unlawful objective or lacks majority support. If the Board determines the strike is indeed illegal, employees must return to work within the following twenty-four hours or otherwise face termination of their labor relationship with the employer. When dealing with a strike, it is important to note that all days and all hours are working days, including Saturdays and Sundays. C. Current Union Situation in Mexico According to the Mexican Institute of Geography and Statistics (INEGI) up until 2008, 95.75% of the economically active population is in fact employed as shown in the graphic below; however in our opinion the unemployment rate has increased significantly during the past months due to the global crisis: National Rate of Not Occupied Population (Percentage of the Economically Active Population) From such amount approximately 14% of workers in Mexico are covered by collective bargaining agreements.

4 II. REDUCTION IN FORCE A. Collective Terminations The process to be followed in the event of a collective dismissal depends on whether a collective bargaining agreement has been executed by the employer and a union (which is applicable to the dismissed employees) or not. If a collective bargaining agreement has been executed, then the process established therein should be followed. On the other hand, if a collective bargaining agreement has not been executed, then the process to be followed will be determined by the FLL. As a result, in the second case above, in order to reduce the work force of any employer in Mexico as a consequence of the companies closing business or the definite reduction on jobs, a special procedure must be followed. In the understanding that article 434 of the FLL establishes the grounds for collective terminations, as follows: I) The force major or the fortuitous event not imputable to the employer, his/her physical or mental disability, or his/her death, which has as a direct and immediate consequence the termination of the labor relationships. II) III) IV) The well-known and notorious non - affordable operation of the business. Exhaustion of the substance being extracted by a miming company The cases foreseen in Article 38 (labor relationships on mine & natural resources extractive industries for a definite period of time). V) Statutory declaration of insolvency proceedings or bankruptcy, if the competent authority or the creditors decide on the definite closing down of the company or the definite retrenchment of production B. Severance payment In the cases described in sections I, II, III and V, with exemption of section IV, employees will be entitled to an indemnification equivalent to three months aggregate salary plus a

5 seniority premium consisting of 12 days per each year of services, calculated with a cap of the double of the minimum wage in the applicable geographical zone, in the understanding that the current minimum wage in effect in Mexico City is of $ C. Number of Employees The FLL does not provide that a specific number of employees need to be terminated within a specific period of time, in order to deem the dismissal as a collective dismissal. Such classification depends on whether the dismissal is due to (a) a business and/or facilities shut down; (b) the definite reduction of the employer s activities; or (c) the reduction of personnel due to the installation of new machinery or new methods of work. D. Legal Procedure to Follow In the cases foreseen by sections I and V above, the employer will have to notify the collective termination to the Labor Board, in order to obtain its approval and will have to follow a special procedure established by the FLL. In the case foreseen by section III above, prior to carrying out any termination, the employer will require the authorization of the Labor Board, in accordance with the procedure established by the FLL. In both cases, the Labor Board will analyze the evidences offered by the parties and those required from third parties before issuing a resolution. Moreover, in the case foreseen by section II above, prior to carrying out any termination, the employer will need to obtain the authorization from the Labor Board, in accordance with the provisions established for the collective conflicts of economic nature, which procedure is explained as follows. Collective conflict of economic nature: As provided by Article 900 of the FLL, collective conflicts of an economic nature are recognized as those which aim to modify or implement new labor conditions, suspend or terminate collective labor relationships.

6 In this kind of procedures, the Labor Board will make its best effort to have the parties reach a settlement, through conciliation at any stage of the process. A strike suspends the process of the collective conflicts of economic nature. If the strike takes place, the Union can unilaterally decide whether or not to submit the conflict to the arbitration of the Labor Board. The long lasting procedure and its complexity make this procedure quite ineffective, reason why it is more common for employers to negotiate the collective terminations with the Union. E. Union s Role In case of collective terminations, Unions play a very important role, as the collective agreement shall also be terminated. The latter therefore implies a strategic negotiation between the employer and the Union to carry such termination in the best way possible for both parties. In Mexico Unions are very strong derived from their pressure in collective labor relationships and the continuous menace of a strike, reason why it is very important for employers in Mexico to have a friendly environment and mutual respect between them and the Unions, in order to reach their cooperation with the employer regarding the process. In case the Union and the employer reach an agreement before any legal procedure is filed, the severance payment (three months plus twenty days per year) can be negotiated with the employee being terminated if and only the employee agrees with the amount to be paid. In any case it is strongly advisable to execute a termination agreement when a termination takes place, which must be ratified with the Labor Board in order to have legal effects and to avoid labor liabilities for the employer as a future claim for pending benefit payments. If no agreement is reached with the Union, it is a very common practice that the Union exercises its right to call for a strike in order to force the employer to guarantee the severance pay that the workers are entitled to according to the FLL. This is the main reason why the strategic negotiation with the Union shall be planned prior to the closing of a company.

7 III. CONCLUSION The global economic crisis has raised employers, Unions, government and in general the societies consciousness to focus on preserving jobs in Mexico. In view of the above, the parties have reached unique and never seen before agreements to make working conditions flexibly. Some of the measures that are being taken include reduction of work weeks, reduction of salaries, work shifts, modification of benefit structures, among others. Bearing in mind that protective nature of labor laws not only in Mexico but also in other Latin-American countries, when implementing the above mentioned structures, employers should carefully document the agreements reached to avoid potential labor liabilities such as constructive dismissal and payment of severances. Contact information: Oscar de la Vega Basham Ringe y Correa, S.C. Paseo de los Tamarindos No. 400, 9th floor Col. Bosques de las Lomas México, City Mexico Tel. +(5255) oscardlv@basham.com.mx

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